q210q_intermec.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   
SECURITIES EXCHANGE ACT OF 1934
     
For the quarterly period ended June 27, 2010
     
OR
     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   
SECURITIES EXCHANGE ACT OF 1934
     
For the transition period from to

Commission file number: 001-13279
 

Intermec, Inc.
(Exact name of registrant as specified in its charter)

Delaware
 
95-4647021
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
6001 36th Avenue West, Everett, WA
 
98203-1264
(Address of principal executive offices)
 
(Zip Code)
(425) 348-2600
(Registrant’s telephone number, including area code)
 
[None]
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes ý
No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
 
Yes ý
No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ý
     
Accelerated filer o
         
Non-accelerated filer o
     
Smaller reporting company filer o
(Do not check if a smaller reporting company)
       

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o
No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at July 23, 2010
Common Stock, $0.01 par value per share
 
61,854,804 shares
 
 
 
 
 
 
 
 
 
INTERMEC, INC.
TABLE OF CONTENTS
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 27, 2010
 
   
Page
Number
 
PART I. FINANCIAL INFORMATION
     
       
     
         
     
 
           
     
 
           
     
 
           
       
           
     
           
   
 
           
   
 
           
PART II. OTHER INFORMATION
       
           
   
 
           
   
 
           
 ITEM 5.      
           
   
 
         
       
 
 
 
 
 
 
 


 

 
 
 
 
 
 
 
PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
INTERMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 27, 2010
   
June 28, 2009
   
June 27, 2010
   
June 28, 2009
 
                         
Revenues:
                       
    Product
 
$
128,729
   
$
123,339
   
$
244,472
   
$
252,002
 
    Service
   
32,432
     
34,376
     
65,919
     
68,286
 
        Total revenues
   
161,161
     
157,715
     
310,391
     
320,288
 
                                 
Costs and expenses:
                               
    Cost of product revenues
   
81,952
     
80,927
     
154,843
     
164,293
 
    Cost of service revenues
   
19,799
     
19,714
     
39,119
     
39,851
 
    Research and development
   
18,315
     
15,375
     
33,288
     
31,288
 
    Selling, general and administrative
   
45,916
     
44,711
     
90,832
     
95,719
 
    Restructuring charges
   
225
     
7,345
     
962
     
15,927
 
    Impairment of facility
   
587
     
-
     
3,008
     
-
 
         Total costs and expenses
   
166,794
     
168,072
     
322,052
     
347,078
 
                                 
Operating loss
   
(5,633
)
   
(10,357
)
   
(11,661
)
   
(26,790
)
Interest income
   
394
     
261
     
544
     
602
 
Interest expense
   
(323
)
   
(227
)
   
(668
)
   
(452
)
Loss before income taxes
   
(5,562
)
   
(10,323
)
   
(11,785
)
   
(26,640
)
    Income tax benefit
   
(2,854
)
   
(3,781
)
   
(5,431
)
   
(9,698
)
Net loss
 
$
(2,708
)
 
$
(6,542
)
 
$
(6,354
)
 
$
(16,942
)
                                 
Basic loss per share
 
$
(0.04
)
 
$
(0.11
)
 
$
(0.10
)
 
$
(0.28
)
Diluted loss per share
 
$
(0.04
)
 
$
(0.11
)
 
$
(0.10
)
 
$
(0.28
)
                                 
Shares used in computing basic loss per share
   
61,949
     
61,606
     
61,896
     
61,532
 
Shares used in computing diluted loss per share
   
61,949
     
61,606
     
61,896
     
61,532
 
 
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
 

 
 
 
 
1
 
 

 
INTERMEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
   
June 27, 2010
   
December 31, 2009
 
ASSETS
           
Current assets:
           
  Cash and cash equivalents
 
$
186,622
   
$
201,884
 
  Short-term investments
   
36,608
     
36,301
 
  Accounts receivable, net
   
94,307
     
106,890
 
  Inventories, net
   
92,997
     
101,537
 
  Current deferred tax assets, net
   
53,080
     
51,140
 
  Assets held for sale
   
3,196
     
 -
 
  Other current assets
   
15,662
     
16,826
 
    Total current assets
   
482,472
     
514,578
 
                 
Property, plant and equipment, net
   
36,880
     
37,383
 
Other acquired intangibles, net
   
2,057
     
2,587
 
Deferred tax assets, net
   
188,160
     
182,457
 
Other assets
   
28,004
     
34,404
 
Total assets
 
$
737,573
   
$
771,409
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
  Accounts payable and accrued expenses
 
$
81,222
   
$
102,607
 
  Payroll and related expenses
   
21,968
     
20,683
 
  Deferred revenue
   
38,559
     
39,038
 
    Total current liabilities
   
141,749
     
162,328
 
                 
Long-term deferred revenue
   
21,641
     
22,010
 
Pension and other postretirement benefits liabilities
   
79,116
     
81,897
 
Other long-term liabilities
   
14,319
     
14,891
 
                 
Commitments
               
                 
Shareholders' equity:
               
  Common stock (250,000 shares authorized, 62,362 and 62,203 shares issued and 61,795 and 61,653 outstanding)
   
624
     
622
 
  Additional paid-in-capital
   
708,696
     
703,590
 
  Accumulated deficit
   
(180,599
)
   
(174,245
)
  Accumulated other comprehensive loss
   
(47,973
)
   
(39,684
)
    Total shareholders' equity
   
480,748
     
490,283
 
Total liabilities and shareholders' equity
 
$
737,573
   
$
771,409
 
 
 
 
See accompanying notes to condensed consolidated financial statements.
 


 
 
 
2
 
 
 

INTERMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
   
Six Months Ended
   
June 27, 2010
   
June 28, 2009
 
Cash and cash equivalents at beginning of the period
 
$
201,884
   
$
221,335
 
                 
Cash flows from operating activities:
               
Net loss
   
(6,354
)
   
(16,942
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
               
Depreciation and amortization
   
7,422
     
7,846
 
Impairment of facility
   
3,008
     
-
 
Deferred taxes
   
(6,790
)
   
(10,524
)
Stock-based compensation
   
4,241
     
4,172
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
8,809
     
33,604
 
Inventories
   
7,025
     
25,021
 
Accounts payable and accrued expenses
   
(19,554
)
   
(34,884
)
Other long-term liabilities
   
54
 
   
(3,153
)
Other operating activities
   
1,425
     
3,531
 
  Net cash (used in) provided by operating activities
   
(714
   
8,671
 
                 
Cash flows from investing activities:
               
Additions to property, plant and equipment
   
(6,759
)
   
(4,720
)
Sales of property, plant and equipment
   
-
     
1,867
 
Capitalized patent legal fees
   
(1,487
)
   
(2,321
)
  Net cash used in investing activities
   
(8,246
)
   
(5,174
)
                 
Cash flows from financing activities:
               
Stock options exercised and other
   
863
     
870
 
  Net cash provided by financing activities
   
863
     
870
 
                 
Effect of exchange rate changes on cash and cash equivalents
   
(7,165
)
   
1,373
 
Resulting (decrease) increase in cash and cash equivalents
   
(15,262
)
   
5,740
 
                 
Cash and cash equivalents at end of the period
 
$
186,622
   
$
227,075
 

 
 
See accompanying notes to condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 


 
 
 
3
 
 
 

INTERMEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
  
1. Basis of Presentation

Our interim financial periods are based on a thirteen-week internal accounting calendar. In our opinion, the accompanying balance sheets, interim statements of operations and statements of cash flows include all adjustments, consisting mainly of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of Intermec and our subsidiaries. Intercompany transactions and balances have been eliminated. Preparing our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and financial data included in the accompanying notes to the financial statements. Actual results and outcomes may differ from our estimates and assumptions.
 
Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009, as amended (the “2009 Form 10-K”).
  
Recent Accounting Pronouncements Not Yet Adopted
 
In October 2009, the Financial Accounting Standard Board (“FASB”) updated its guidance on software revenue recognition. According to this update, tangible products containing software components and non-software components, which function together to deliver the tangible product’s essential functionality are no longer within the scope of the software revenue guidance. This update provides additional guidance on how to determine which software, if any, relating to the tangible product should be excluded from the scope of the software revenue guidance. This update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after January 1, 2011. This update must be adopted in the same period using the same transition method as indicated below in the update to revenue arrangements with multiple deliverables. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In October 2009, the FASB updated its guidance on revenue arrangements with multiple deliverables. This guidance alters the criteria for separating consideration in multiple-deliverable arrangements. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. This update also replaces the term "fair value" in the revenue allocation guidance with "selling price" to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a market participant. It also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangements to all deliverables using the relative selling price method. This update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after January 1, 2011. We are currently assessing the potential impact that adoption of this guidance may have on our consolidated financial statements.
 
Reclassification
 
Certain amounts within the 2009 condensed consolidated financial statements have been reclassified to conform to the 2010 presentation.
 
 
 
4
 
 
 
 
INTERMEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
Immaterial Restatement of the Statement of Cash Flows
 
Subsequent to the issuance of our 2009 consolidated financial statements, we determined that certain balances within the 2009 condensed consolidated statement of cash flows were misstated due to non-cash foreign currency adjustments related to working capital items that were inappropriately mapped to the effect of exchange rates on cash and cash equivalents contrary to ASC 30, Statement of Cash Flows. In addition, we corrected for the tax benefit from stock-based payment arrangements as prescribed by ASC 718, Compensation - Stock Compensation. As a result, the affected line items under Cash flows from operating activities, Cash flows from financing activities, and effect of exchange rate changes on cash and cash equivalents of the condensed consolidated statement of cash flows for the six months ended June 28, 2009, have been restated as follows (in thousands):
 
   
Six Months Ended June 28, 2009
 
   
As Reported
   
As Restated
 
Cash flows from operating activities:
           
Deferred taxes
  $ (10,634 )   $ (10,524 )
Excess tax benefit from stock-based payment arrangements
    547       -  
Changes in operating assets and liabilities:
               
Accounts receivable
    32,289       33,604  
Inventories
    24,516       25,021  
Accounts payable and accrued expenses
    (34,968 )     (34,884 )
Other long-term liabilities
    (2,584 )     (3,153 )
Other operating activities
    3,567       3,531  
  Net cash provided by operating activities     7,809       8,671  
                 
Cash flows from financing activities:
               
Excess tax benefit from stock-based payment arrangements
    (547 )     -  
  Net cash provided by financing activities     323       870  
                 
Effect of exchange rate changes on cash and cash equivalents
  $ 2,782     $ 1,373  
 
The "As Reported" amounts are presented after the impact of reclassifications described above.
 
The restatements impacted only line items within the condensed consolidated statement of cash flows, and do not result in any change in the beginning and ending balances of cash and cash equivalents from the amounts previously reported. The restated line items do not have any impact on the condensed consolidated balance sheets or statements of operations for any period. We have also set forth in Part II, Item 5, disclosure regarding impact of the restatement of the affected line items of the consolidated statement of cash flows for the years ended December 31, 2009 and 2008, and of the condensed consolidated statement of cash flows for the three months ended March 28, 2010, March 29, 2009, and nine months ended September 27, 2009. We do not consider any of these corrections to be material.
 
 
 
5
 
 

 
INTERMEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
2. Fair Value Measurements
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
Our financial assets and liabilities subject to these fair value measurement provisions as of June 27, 2010, were comprised of the following (in thousands):
 
                     
Balance as of
   
Level 1
   
Level 2
   
Level 3
   
June 27, 2010
 
Money market funds
 
$
103,412
   
$
-
   
$
-
   
$
103,412
 
Certificates of deposit
   
23,565
     
-
     
-
     
23,565
 
Bond fund
   
30,682
     
-
     
-
     
30,682
 
Stock
   
175
     
-
     
-
     
175
 
Derivative instruments – assets
   
-
     
912
     
-
     
912
 
    Total assets at fair value
 
$
157,834
   
$
912
   
$
-
   
$
158,746
 
                                 
                           
Balance as of
 
   
Level 1
   
Level 2
   
Level 3
   
June 27, 2010
 
Derivative instruments – liabilities
 
$
-
   
$
(564
)
 
$
-
   
$
(564
)
    Total liabilities at fair value
 
$
-
   
$
(564
)
 
$
-
   
$
(564
)

Our financial assets and liabilities subject to these fair value measurement provisions as of December 31, 2009, were comprised of the following (in thousands):
 
                     
Balance as of
 
   
Level 1
   
Level 2
   
Level 3
   
December 31, 2009
 
Money market funds
 
$
111,971
   
$
-
   
$
-
   
$
111,971
 
Certificates of deposit
   
12,142
     
-
     
-
     
12,142
 
Bond fund
   
30,459
     
-
     
-
     
30,459
 
Stock
   
166
     
-
     
-
     
166
 
Derivative instruments - assets
   
-
     
1,743
     
-
     
1,743
 
  Total assets at fair value
 
$
154,738
   
$
1,743
   
$
-
   
$
156,481
 
                                 
                           
Balance as of
 
   
Level 1
   
Level 2
   
Level 3
   
December 31, 2009
 
Derivative instruments - liabilities
 
$
-
   
$
(1,199
)
 
$
-
   
$
(1,199
)
  Total liabilities at fair value
 
$
-
   
$
(1,199
)
 
$
-
   
$
(1,199
)

Our level 2 financial instrument values are based on comparable sales, such as quoted market rates for similar contracts. Level 3 values refer to fair values using unobservable inputs that are not corroborated by market data.



 
 
 

 
 
6
 
 
 
 
INTERMEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
2. Fair Value Measurements (continued)
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

All other nonfinancial assets and liabilities measured at fair values in the financial statements on a nonrecurring basis are subject to fair value measurements and disclosures. Nonfinancial nonrecurring assets and liabilities included on our condensed consolidated balance sheets include long lived assets that are measured at fair value to test for and measure impairment, at least annually or when necessary. During the three and six months ended June 27, 2010, we recorded impairment losses of approximately $0.6 and $3.0 million, respectively, related to a real estate asset we hold. The fair value of this asset was measured using unobservable inputs (level 3). This asset with an adjusted carrying value of $3.2 million as of June 27, 2010 is classified within assets held for sale.

The estimated fair values of certain cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and payroll and related expenses at June 27, 2010, and June 28, 2009, approximate their carrying values due to their short-term nature.

3. Derivative Instruments
 
Due to our global operations, we are exposed to foreign currency exchange rate fluctuations in the normal course of our business. Our treasury policies allow us to offset the risks associated with the effects of certain foreign currency exposures through the purchase of foreign exchange forward contracts. Our policy prohibits speculation in financial instruments for profit on the exchange rate price fluctuation. We enter into foreign exchange forward contracts primarily to hedge the impact of fluctuations of foreign exchange arising from intercompany transactions, including inventory purchases made by our subsidiaries that are denominated in U.S. dollars. Our foreign exchange forward contracts are not designated as hedging instruments for accounting purposes; accordingly, we record these contracts at fair value on the consolidated balance sheets, with changes in fair value recognized in earnings in the period of change. The aggregate notional amounts of the forward contracts we held for foreign currencies were $47.4 million as of June 27, 2010. Principal currencies we hedged include the Euro, British Pound, Mexican Peso, and Swedish Krona. These contracts do not contain any credit-risk-related contingent features.

We attempt to manage the counterparty risk associated with these foreign exchange forward contracts by limiting transactions to counterparties with which we have an established banking relationship. In addition, these contracts generally settle in approximately 30 days. See Note 2, Fair Value Measurements, for information on the fair value of these contracts.
 
The net gain resulting from these contracts recorded in selling, general and administrative expense was approximately $0.2 and $0.1 million for the quarters ended June 27, 2010, and June 28, 2009, respectively. We recorded a net asset (liability) of $0.3 and $(0.2) million in other current assets or accounts payable and accrued expense for the quarters ended June 27, 2010, and June 28, 2009, respectively.
 
4. Accounts Receivable, Net
   
    Accounts receivable, net, consisted of the following (in thousands):

   
June 27, 2010
   
December 31, 2009
 
Accounts receivable, gross
 
$
98,792
   
$
117,223
 
Less:
               
Allowance for sales returns
   
3,277
     
9,006
 
Allowance for doubtful accounts
   
1,208
     
1,327
 
Accounts receivable, net
 
$
94,307
   
$
106,890
 
 
Our allowance for sales returns includes estimated customer returns and other incentives that were recorded as a reduction of sales for June 27, 2010. For the period ended December 31, 2009, our allowance for sales returns included estimated customer returns, price exceptions, and other incentives that were part of sales. Beginning in 2010, we began to globally record price exceptions directly to the customers‘ account instead of an allowance to gross receivables. One customer, ScanSource, accounted for 11% and 18% of our accounts receivable as of June 27, 2010, and December 31, 2009, respectively.
 
 
 
 
 
 
 
 
 
7
 
 

 
INTERMEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
5. Inventories
 
Inventories consisted of the following (in thousands):

   
June 27, 2010
   
December 31, 2009
 
Raw materials
 
$
39,854
   
$
45,449
 
Service parts
   
9,074
     
7,794
 
Work in process
   
225
     
252
 
Finished goods
   
43,844
     
48,042
 
  Inventories, net
 
$
92,997
   
$
101,537
 
 
In addition to the inventories described above, service parts inventories totaling $3.8 and $4.3 million that were not expected to be sold within the next 12 months are classified as other assets as of June 27, 2010, and December 31, 2009, respectively.
 
6. Provision for Income Taxes
 
The tax benefit for the three and six months ended June 27, 2010, reflects an effective tax rate for continuing operations of 51.3% and 46.1%, respectively, compared to a U.S. statutory rate of 35.0%. The effective tax rate reflects our estimated annual effective tax rate of approximately 50.8% for the fiscal year 2010, which excludes the impact of discrete items. Our projected 2010 effective tax rate is higher than 2009 due primarily to our projected mix and levels of taxable income between jurisdictions and the U.S. research and development tax credit benefits that existed in 2009, which Congress has not renewed for 2010.
 
The U.S. Congress is currently considering bills that will extend the availability of the research and development tax credit. If the research and development credit is legislatively extended in and applicable to calendar year 2010, we expect there will be a favorable impact on our 2010 effective income tax rate of approximately 4.6% or $1.0 million in benefit.
 
The tax benefit for the three and six months ended June 28, 2009, reflected an effective tax rate for continuing operations of 36.6% and 36.4%, respectively, compared to a U.S. statutory rate of 35.0%. The effective tax rate reflected our then estimated annual effective tax rate of approximately 37.0% for fiscal year 2009, which excluded the impact of discrete items.

7. Shares Used in Computing Loss per Share
 
Basic loss per share is calculated using the weighted average number of common shares outstanding and issuable for the applicable period. Diluted loss per share is computed using basic weighted average shares plus the dilutive effect of unvested restricted stock and outstanding stock options using the “treasury stock” method.
 
   
Three Months Ended
   
Six Months Ended
 
   
June 27, 2010
   
June 28, 2009
   
June 27, 2010
   
June 28, 2009
 
Weighted average shares - basic
   
61,948,667
     
61,606,452
     
61,895,874
     
61,532,026
 
Dilutive effect of unvested restricted shares and stock options
   
-
     
-
     
-
     
-
 
Weighted average shares - diluted
   
61,948,667
     
61,606,452
     
61,895,874
     
61,532,026
 

Our employees and directors held options to purchase 2,986,482 and 2,672,601 shares of our common stock for the three and six months ended June 27, 2010, respectively, and 3,152,452 and 2,931,060 shares of our common stock for the three and six months ended June 28, 2009, respectively, that were not included in weighted average shares diluted calculation because they were anti-dilutive to the diluted loss per share computation. These options would become dilutive in future periods if the average market price of our common stock exceeds the exercise price of the outstanding options and we report net earnings.
 
 
 
 
8
 
 

 
INTERMEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
8. Stock-Based Compensation

A summary of share-based compensation expense related to employee stock options, Restricted Stock Units (“RSU”) and Performance Stock Units (‘PSU”) for the three and six months ended June 27, 2010, (in thousands) is as follows:
 
   
Three Months Ended June 27, 2010
   
Six Months Ended June 27, 2010
 
Stock-based compensation expense:
           
Cost of revenue
 
$
63
   
$
126
 
Selling, general and administrative
   
2,153
     
3,879
 
Total
 
$
2,216
   
$
4,005
 

For the three and six months ended June 27, 2010, we granted 602,053 and 702,802 options, respectively, to employees with an average fair value of $4.56 and $4.64 per option, respectively, which will vest annually in substantially equal quantities over four years from the date of grant. For the three and six months ended June 27, 2010, we granted 32,320 options to our directors with a fair value of $5.09 per option, which will vest quarterly over one year from the quarter they are granted. The Black-Scholes assumptions used for these calculations are as follows:
  
   
Stock Options Granted to Employees
 
Stock Options Granted to Directors
 
   
Three Months Ended June 27, 2010
   
Six Months Ended June 27, 2010
   
Three and Six Months Ended June 27, 2010
 
Fair value assumptions:
                 
Expected term in years
   
5.08
     
4.98
     
6.51
 
Expected volatility
   
44.31
%
   
43.05
%
   
44.29
%
Expected dividend yield
   
0.00
%
   
0.00
%
   
0.00
%
Risk-free interest rate
   
2.08
%
   
2.10
%
   
2.08
%

9. Shareholders’ Equity
 
Our accumulated other comprehensive loss consisted of the following (in thousands):

   
June 27, 2010
   
December 31, 2009
 
Foreign currency translation adjustment
 
$
(4,628
)
 
$
3,900
 
Unamortized benefit plan costs, net of tax of $23,954 and $23,918
   
(43,159
)
   
(43,402
)
Unrealized loss on investments, net of tax of $(66) and $(65)
   
(186
)
   
(182
)
  Accumulated other comprehensive loss
 
$
(47,973
)
 
$
(39,684
)
 
Other comprehensive (loss) income for the three and six months ended June 27, 2010, and June 28, 2009, was as follows (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
June 27, 2010
   
June 28, 2009
   
June 27, 2010
   
June 28, 2009
 
Net loss
$
(2,708
)
 
$
(6,542
)
 
$
(6,354
)
 
$
(16,942
)
Other comprehensive (loss) income:
                             
  Foreign currency translation adjustments
 
(4,933
)
   
5,906
     
(8,528
)
   
2,337
 
  Unrealized gain (loss) on investment, net of tax
 
(26
)
   
40
     
(4
)
   
(16
)
  Amortization of benefit plan costs, net of tax
 
(290
)
   
24,558
     
243
     
25,266
 
Total other comprehensive (loss) income
 
(5,249
)
   
30,504
     
(8,289
)
   
27,587
 
  Total comprehensive (loss) income
$
(7,957
)
 
$
23,962
   
$
(14,643
)
 
$
10,645
 

 
 
 
9
 
 
 
 
INTERMEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
10. Segment Reporting

 Our reportable segments are comprised of products and services. The product segment generates revenue from the development, manufacture, sale and resale of wired and wireless automated identification and data collection (“AIDC”) products, mobile computing products, wired and wireless bar code printers, label media and radio frequency identification (“RFID”) products and license fees. The service segment generates revenue from customer support, product maintenance and professional services related to the products and systems integration.

The accounting policies of our two reportable segments are the same as those used to prepare our consolidated financial statements. Performance and resource allocation are primarily measured by sales and standard gross profit. All other earnings, costs and expenses are aggregated and reported on a consolidated basis.
 
One distributor, ScanSource Inc., accounted for more than 10% of our revenues. Total sales to this distributor were $40.4 and $70.6 million for the three and six months ended June 27, 2010, respectively, and $31.4 and $52.0 million for the three and six months ended June 28, 2009, respectively.

The following table sets forth our revenues and gross profit by reportable segment (in thousands):

   
Three Months Ended
   
Six Months Ended
   
June 27, 2010
   
June 28, 2009
   
June 27, 2010
   
June 28, 2009
 
Revenues:
                       
Product
 
$
128,729
   
$
123,339
   
$
244,472
   
$
252,002
 
Service
   
32,432
     
34,376
     
65,919
     
68,286
 
  Total
 
$
161,161
   
$
157,715
   
$
310,391
   
$
320,288
 
                                 
Gross profit:
                               
Product
 
$
46,777
   
$
42,412
   
$
89,629
   
$
87,709
 
Service
   
12,633
     
14,662
     
26,800
     
28,435
 
  Total
 
$
59,410
   
$
57,074
   
$
116,429
   
$
116,144
 

The following table sets forth our revenues by product lines (in thousands):
 
   
Three Months Ended
   
Six Months Ended
   
June 27, 2010
   
June 28, 2009
   
June 27, 2010
   
June 28, 2009
 
Revenues:
                       
Systems and solutions
 
$
86,292
   
$
86,249
   
$
165,443
   
$
179,387
 
Printer and media
   
42,437
     
37,090
     
79,029
     
72,615
 
Service
   
32,432
     
34,376
     
65,919
     
68,286
 
  Total
 
$
161,161
   
$
157,715
   
$
310,391
   
$
320,288
 
 

11. Product Warranties

The following table indicates accumulated six months and twelve months change in our warranty liability included in current liabilities as of June 27, 2010, and December 31, 2009, respectively, (in thousands):
 
   
June 27, 2010
   
December 31, 2009
 
Beginning balance
 
$
2,913
   
$
4,220
 
Payments or parts usage
   
(1,976
)
   
(5,789
)
Additional provision
   
2,325
     
4,482
 
Ending balance
 
$
3,262
   
$
2,913
 

 
10
 
 

 
INTERMEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
12. Commitments and Contingencies   
 
We have entered into a variety of agreements with third parties that include indemnification clauses, both in the ordinary course of business and in connection with our divestitures of certain product lines. These clauses require us to compensate these third parties for certain liabilities and damages incurred by them. Fair value of guarantees is required to be recorded as a liability. We do not believe that we have any significant exposure related to such guarantees and therefore have not recorded a liability as of June 27, 2010, and December 31, 2009, respectively. We have not made any significant indemnification payments as a result of these clauses. 
 
We capitalize external legal costs incurred in the defense of our patents where we believe that there is an evident increase in the value of the patent and that the successful outcome of the legal action is probable.  As of June 27, 2010 and December, 31, 2009, $12.0 and $11.4 million of legal patent costs have been capitalized, respectively.
 
We currently, and from time to time, are subject to claims and lawsuits arising in the ordinary course of business. The ultimate resolution of currently pending proceedings is not expected to have a material adverse effect on our business, financial condition, results of operations or liquidity.
 
13. Pension and Other Postretirement Benefits Liabilities
 
The components of net pension and postretirement periodic benefit cost (income) for the three and six months ended June 27, 2010, and June 28, 2009, are as follows (in thousands):
 
   
U.S. Defined Benefit Plans
   
Non-U.S. Defined Benefit Plans
   
Other Postretirement Benefit Plans
 
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
 
Three Months Ended June 27, 2010, and June 28, 2009
                                   
Service cost
 
$
-
   
$
241
   
$
74
   
$
-
   
$
-
   
$
-
 
Interest cost
   
2,104
     
2,975
     
462
     
426
     
64
     
64
 
Expected return on plan assets
   
(2,803
)
   
(2,703
)
   
(559
)
   
(407
)
   
-
     
-
 
Amortization and deferrals:
                                               
Transition asset
   
-
     
-
     
(31
)
   
(31
)
   
-
     
-
 
Actuarial loss
   
247
     
339
     
9
     
9
     
11
     
-
 
Prior service cost (income)
   
-
     
(246
)
   
-
     
-
     
-
     
-
 
Curtailment gain
   
-
     
(475
)
   
-
     
-
     
-
     
-
 
  Net pension and postretirement periodic benefit cost (income)
 
$
(452
 
$
131
   
$
(45
)
 
$
(3
)
 
$
75
   
$
64
 

   
U.S. Defined Benefit Plans
   
Non-U.S. Defined Benefit Plans
   
Other Postretirement Benefit Plans
 
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
 
Six Months Ended June 27, 2010, and June 28, 2009
                                   
Service cost
 
$
189
   
$
569
   
$
148
   
$
-
   
$
-
   
$
-
 
Interest cost
   
4,208
     
5,912
     
924
     
853
     
128
     
128
 
Expected return on plan assets
   
(5,605)
     
(5,397
)
   
(1,118
)
   
(815
)
   
-
     
-
 
Amortization and deferrals:
                                               
Transition asset
   
-
     
-
     
(62
)
   
(61
)
   
-
     
-
 
Actuarial loss
   
495
     
1,291
     
18
     
17
     
22
     
-
 
Prior service cost (income)
   
-
     
(103
)
   
-
     
-
     
-
     
-
 
Curtailment gain
   
-
     
(475
)
   
-
             
-
     
-
 
  Net pension and postretirement periodic benefit cost (income)
 
$
(713
 
$
1,797
   
$
(90
)
 
$
(6
)
 
$
150
   
$
128
 
 
 
 
 
11
 
 

 
INTERMEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
13. Pension and Other Postretirement Benefits Liabilities (continued)
 
Our pension and other postretirement benefit plans contributions for the three and six months ended June, 27, 2010, are as follows (in millions):
 
   
Three Months Ended
   
Six Months Ended
 
   
June 27, 2010
   
June 27, 2010
 
U.S. defined benefit postretirement benefit plans
  $ 1.9     $ 3.7  
Matching contributions to 401(k) plan
    0.7       1.4  
Foreign pension plans
    0.6       1.1  
Total
  $ 3.2     $ 6.2  
 
Benefits paid pertaining to our other postretirement benefit plans were not material during the three and six month periods ended June 27, 2010.

We expect to contribute an additional $6.6 million to these plans during the remainder of 2010, of which $3.7 million relates to benefit payments to our funded and unfunded U.S. defined benefit plans, $1.5 million in matching contributions to our 401(k) plan, $1.2 million in contributions to our foreign pension plans and $0.2 million in benefit payments pertaining to our other postretirement benefit plans.
 
In April 2009, our business restructuring plan (see Note 14, Restructuring Charges) resulted in a reduction of our workforce and the curtailment of pension benefits to the terminated employees who were participants in the U.S. pension plans. The curtailment required a new measurement of the liability to determine the gain or loss on curtailment.
 
14. Restructuring Charges
 
The total pre-tax restructuring costs for the restructuring plan announced in January 2009 were approximately $9.5 million, including employee termination costs of approximately $8.4 million, and $1.1 million of other transitional costs. We recorded the entire restructuring charge in 2009, and substantially all of the severance-related and periodic transitional costs were cash expenditures.
 
The total restructuring costs for the restructuring plan announced in April 2009 are in an anticipated pre-tax range of $11.0 to $13.0 million, including employee termination costs of $10.0 to $11.0 million, and $1.0 to $2.0 million of other transitional costs. We recorded $11.1 million of the restructuring charges in 2009, and $0.2 and $1.0 million for the three and six months ended June 27, 2010, respectively. We expect to record the remaining charge, which is related primarily to real estate and is expected to be non-cash, throughout 2010. We anticipate that substantially all of the severance-related and periodic transitional costs will be cash expenditures.
 
We made cash payments totaling $0.7 and $2.9 million for the three and six months ended June 27, 2010, in connection with the restructuring plans announced in January and April 2009.

The following table displays the restructuring charges incurred by reportable segment (in millions):
 
         
Restructuring Charges Recorded for
       
Segment
 
Total Charges Expected to be Incurred
   
Three Months Ended June 27, 2010
   
Six Months Ended June 27, 2010
   
Total Restructuring Charges Incurred to Date
 
Product
 
$
1.7
   
$
-
   
$
-
   
$
1.7
 
Service
   
1.8
     
-
     
-
     
1.8
 
Unallocated
   
19.8
     
0.2
     
1.0
     
18.0
 
Total
 
$
23.3
   
$
0.2
   
$
1.0
   
$
21.5
 
 
 
 
 
12
 
 

 
    INTERMEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
14. Restructuring Charges (continued)
 
The reconciliation of accrued restructuring charges as of June 27, 2010, is summarized in the table below (in millions):
 
   
Accrued Employee Termination Costs per Contract
   
Accrued One-Time Employee Termination Costs
   
Accrued Total Employee Termination Costs
   
Accrued Other Costs
   
Total Accrued Restructuring Charges
 
Balance at December 31, 2009
 
$
2.6
   
$
0.3
   
$
2.9
   
$
-
   
$
2.9
 
Restructuring charges recorded in 2010
   
0.2
     
0.8
     
1.0
     
-
     
1.0
 
Utilization of 2009 restructuring plans
   
(1.8
)
   
(1.1
)
   
(2.9
)
   
-
     
(2.9
)
Balance at June 27, 2010
 
$
1.0
   
$
-
   
$
1.0
   
$
-
   
$
1.0
 
 
 
 
13
 
 

 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS AND RISK FACTORS; SAFE HARBOR 
 
Statements made in this filing and any related statements that express Intermec’s or our management’s intentions, hopes, indications, beliefs, expectations, guidance, estimates, forecasts or predictions of the future constitute forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995, and relate to matters that are not historical facts. They include, without limitation, statements about our view of general economic and market conditions, our cost reduction plans, our revenue, expense, earnings or financial outlook for the current or any future period, our ability to develop, produce, market or sell our products, either directly or through third parties, to reduce or control expenses, to improve efficiency, to realign resources, or to continue operational improvement and year-over-year or sequential growth, and about the applicability of accounting policies used in our financial reporting. When used in this document and in documents it refers to, the words “anticipate,” “believe,” “will,” “intend,” “project” and “expect” and similar expressions as they relate to us or our management are intended to identify such forward-looking statements. These statements represent beliefs and expectations only as of the date they were made. We may elect to update forward-looking statements but we expressly disclaim any obligation to do so, even if our beliefs and expectations change.
 
Actual results may differ from those expressed or implied in our forward-looking statements. Such forward-looking statements involve and are subject to certain risks and uncertainties, which may cause our actual results to differ materially from those discussed in a forward-looking statement. These include, but are not limited to, risks and uncertainties described more fully in our reports filed or to be filed with the Securities and Exchange Commission including, but not limited to, our 2009 Form 10-K and quarterly reports on Form 10-Q, which are available on our website at www.intermec.com.
 
You are encouraged to review the Risk Factors portion of Item 1A of Part II of this filing, which discusses the risk factors associated with our business.
 
Overview
 
Intermec, Inc. (“Intermec”, “us”, “we”, “our”) designs, develops, integrates, sells, resells and services wired and wireless automated identification and data collection (“AIDC”) products and provides related services. Our products include mobile computing products, bar code scanners, wired and wireless bar code printers and label media products, and radio frequency identification (“RFID”) products. These products and services allow customers to identify, track and manage their assets and other resources in ways that improve the efficiency and effectiveness of their business operations. Our products are designed to withstand mobile use and rugged warehouse and field conditions.  
 
The key element of our strategy is to provide rugged mobile business solutions that help our customers improve their visibility and control of their businesses and, in the process, lower their costs, increase their revenues and improve customer satisfaction and loyalty.  These business solutions are a collaborative effort between Intermec and our channel partners.  In the pursuit of this strategy, we target high growth opportunities in selected application markets; focus on developing and selling differentiated new products and services; emphasize sales through multi-tiered channel arrangements; and continue the evolution of our supply chain and other initiatives to enhance the efficiency of our global operations.

Our reportable segments comprise products and services. The product segment generates revenue from the design, development, manufacture, sale and resale of mobile computing products, bar code scanners, wired and wireless bar code printers and label media products, and RFID products and license fees. We sell products worldwide for field mobility applications, including asset management, direct store delivery, maintenance and repair, in-transit visibility, and routing and navigation, as well as in-premise applications, including asset management, freight yard operations, inventory management, warehouse operations, and work-in-process management. Our service segment generates revenue from customer support, product maintenance and professional services related to the products and to systems integration.
 
The unfavorable global economy continued to adversely affect our business and revenue during the first half of 2010. Although there are mixed signs that a gradual recovery has begun in some sectors of the economy and regions, we believe that capital spending for both commercial and public sector customers continues to be constrained or slow, particularly for large projects, as contrasted to incremental purchases or small deployments. For potential civilian and military customers in the U.S. Federal government, we expect budgets to continue to be affected by the pace and priority of appropriations and military spending.
 

 
 
14
 
 
 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Our financial reporting currency is the U.S. dollar, and changes in exchange rates can significantly affect our financial trends and reported results.  Our consolidated revenues and operating expenses are vulnerable to the fluctuations of foreign exchange rates; however, our cost of revenues is primarily denominated in U.S. dollars, and therefore, is less affected by changes in foreign exchange rates. If the U.S. dollar weakens year-over-year relative to currencies in our international locations, our consolidated revenues, costs of revenues and operating expenses will be higher than if currencies had remained constant. If the U.S. dollar strengthens year-over-year relative to currencies in our international locations, our consolidated revenues, costs of revenues and operating expenses will be lower than if currencies had remained constant. We believe it is important to evaluate our growth rates before and after the effect of foreign currency changes.

Results of Operations
 
The following discussion compares our results of operations for the three and six months ended June 27, 2010, and June 28, 2009.
 
Results of operations and percentage of revenues were as follows (in millions, except for per share data):
 
   
Three Months Ended
 
Six Months Ended
   
June 27, 2010
   
June 28, 2009
   
June 27, 2010
   
June 28, 2009
 
   
Amounts
   
Amounts
   
Amounts
   
Amounts
 
Revenues
 
$
161.2
   
$
157.7
   
$
310.4
   
$
320.3
 
Costs and expenses:
                               
     Cost of revenues
   
101.8
     
100.6
     
194.0
     
204.1
 
     Research and development
   
18.3
     
15.4
     
33.3
     
31.3
 
     Selling, general and administrative
   
45.9
     
44.7
     
90.8
     
95.7
 
     Restructuring charges
   
0.2
     
7.3
     
1.0
     
15.9
 
     Impairment of facility
   
0.6
     
-
     
3.0
     
-
 
         Total costs and expenses
   
166.8
     
168.0
     
322.1
     
347.0
 
                                 
Operating loss 
   
(5.6
)
   
(10.3
)
   
(11.7
)
   
(26.7
)
Interest, net
   
0.0
     
0.0
     
(0.1
)
   
0.1
 
Loss before income taxes
   
(5.6
)
   
(10.3
)
   
(11.8
)
   
(26.6
)
Income tax benefit
   
(2.9
)
   
(3.8
)
   
(5.4
)
   
(9.7
)
Net loss
 
$
(2.7
)
 
$
(6.5
)
 
$
(6.4
)
 
$
(16.9
)
                                 
Basis loss per share
 
$
(0.04
)
 
$
(0.11
)
 
$
(0.10
)
 
$
(0.28
)
Diluted loss per share
 
$
(0.04
)
 
$
(0.11
)
 
$
(0.10
)
 
$
(0.28
)
                                 
   
Percent of Revenues
   
Percent of Revenues
   
Percent of Revenues
   
Percent of Revenues
 
Revenues
                               
Costs and expenses:
                               
     Cost of revenues
   
63.1
%
   
63.8
%
   
62.5
%
   
63.7
%
     Research and development
   
11.4
%
   
9.8
%
   
10.7
%
   
9.8
%
     Selling, general and administrative
   
28.5
%
   
28.3
%
   
29.3
%
   
29.9
%
     Restructuring charges
   
0.1
%
   
4.6
%
   
0.3
%
   
4.9
%
     Impairment of facility
   
0.4
%
   
0.0
%
   
1.0
%
   
0.0
%
         Total costs and expenses
   
103.5
%
   
106.5
%
   
103.8
%
   
108.3
%
                                 
Operating loss  
   
(3.5
%)
   
(6.5
%)
   
(3.8
%)
   
(8.3
%)
Interest, net
   
0.0
%
   
0.0
%
   
(0.0
%)
   
0.0
%
Loss before income taxes
   
(3.5
%)
   
(6.5
%)
   
(3.8
%)
   
(8.3
%)
Income tax benefit
   
(1.8
%)
   
(2.4
%)
   
(1.7
%)
   
(3.0
%)
Net loss
   
(1.7
%)
   
(4.1
%)
   
(2.1
%)
   
(5.3
%)
 
 
 
 
15
 
 

 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 
Revenues
 
Revenues by category and geographic region and as a percentage of total revenues for the three and six months ended June 27, 2010, and June 28, 2009, as well as the same three and six months revenue changes were as follows (in millions):
 
   
Three Months Ended
           
   
June 27, 2010
   
Percent of Revenues
   
June 28, 2009
   
Percent of Revenues
   
Change
   
Percentage Change
 
Revenues by category:
                                   
  Systems and solutions
 
$
86.3
     
53.5
%
 
$
86.2
     
54.7
%
 
$
0.1
     
0.1
%
  Printer and media
   
42.4
     
26.3
%
   
37.1
     
23.5
%
   
5.3
     
14.3
%
  Service
   
32.5
     
20.2
%
   
34.4
     
21.8
%
   
(1.9
)
   
(5.5
%)
    Total revenues
 
$
161.2
     
100.0
%
 
$
157.7
     
100.0
%
 
$
3.5
     
2.2
%
                                                 
Revenues by geographic region:
                                               
  North America
 
$
84.7
     
52.5
%
 
$
88.4
     
56.1
%
 
$
(3.7
)
   
(4.2
%)
  Europe, Middle East and Africa (EMEA)
   
49.7
     
30.8
%
   
48.5
     
30.7
%
   
1.2
     
2.5
%
  All others
   
26.8
     
16.7
%
   
20.8
     
13.2
%
   
6.0
     
28.8
%
    Total revenues
 
$
161.2
     
100.0
%
 
$
157.7
     
100.0
%
 
$
3.5
     
2.2
%

The increase in quarterly revenue of $3.5 million, or 2.2%, was attributable to a $5.4 million increase in product revenue, partially offset by $1.9 million decrease in service revenue. The increase in product revenue of $5.4 million, or 4.4%, was primarily due to a $5.3 million increase in printer and media products. The increase in sales revenue in printer and media products was primarily driven by an increase in our distribution business.

The decrease in service revenues for the quarter ended June 27, 2010 of $1.9 million, or 5.5%, was primarily due to the decline in U.S. Federal government projects.
 
Geographically, revenues in North America decreased by $3.7 million, or 4.2%, while revenues in EMEA and the rest of the world increased by $1.2 million, or 2.5%, and $6.0 million, or 28.8%, respectively, over the corresponding prior-year period. The reduction in North America revenues was attributable to the decline in U.S. Federal government projects, which was partially offset by an increase in sales revenues in systems and solutions and printer and media products. The increase in EMEA revenues was mainly attributable to an increase in our distribution business, partially offset by the changes in foreign currency conversion rates that unfavorably impacted EMEA revenue by $3.6 million, or 7.4 percentage points, as compared to the foreign currency exchange rate used in prior-year period. Across all regions the unfavorable impact of foreign currency rates as compared to the foreign currency exchange rate used in the prior-year period was $1.9 million, or 1.2 percentage points.
 
 
 
 
 
 
 
 
 
16
 
 

 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 
   
Six Months Ended
           
   
June 27, 2010
   
Percent of Revenues
   
June 28, 2009
   
Percent of Revenues
   
Change
   
Percentage Change
 
Revenues by category:
                                   
  Systems and solutions
 
$
165.5
     
53.3
%
 
$
179.4
     
56.0
%
 
$
(13.9
)
   
(7.7
%)
  Printer and media
   
79.0
     
25.5
%
   
72.6
     
22.7
%
   
6.4
     
8.8
%
  Service
   
65.9
     
21.2
%
   
68.3
     
21.3
%
   
(2.4
)
   
(3.5
%)
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